Company Faces Forgery Charges in Mo. Foreclosures

Published: February 6, 2012

One of the largest companies that provided home foreclosure services to lenders across the nation, DocX, has been indicted on forgery charges by a Missouri grand jury — one of the few criminal actions to follow reports of widespread improprieties against homeowners.

Kelley McCall/Associated Press

Chris Koster, the Missouri attorney general, is investigating DocX.

A grand jury in Boone County, Mo., handed up an indictment Friday accusing DocX of 136 counts of forgery in the preparation of documents used to evict financially strained borrowers from their homes. Lorraine O. Brown, the company’s founder and former president, was indicted on the same charges.

Employees of DocX, a unit of Lender Processing Services of Jacksonville, Fla., executed and notarized millions of mortgage documents for big banks and loan servicers over the years. Lender Processing closed the company in April 2010, after evidence emerged of apparent forgeries in these documents, a practice now called robo-signing.

Chris Koster, the Missouri attorney general, will prosecute the case. “The grand jury indictment alleges that mass-produced fraudulent signatures on notarized real estate documents constitutes forgery,” Mr. Koster said in a statement. “Today’s indictment reflects our firm conviction that when you sign your name to a legal document, it matters.”

Mr. Koster said his office’s investigation was continuing. This suggests he may hope to persuade Ms. Brown to cooperate in his investigation of the parent company. If convicted, Ms. Brown could face up to seven years in prison for each forgery count. DocX could be fined up to $10,000 for each forgery conviction.

Scott Rosenblum, a lawyer at Rosenblum, Schwartz, Rogers & Glass who represents DocX said: “We have not had an opportunity to review the indictment at this point. The company intends to enter a plea of not guilty.”

According to the indictment, Ms. Brown acted “knowingly in concert with DocX and its employees” to mislead and defraud the Boone County recorder of deeds. The documents central to the indictments were deeds of release, which eliminate a previous claim on an asset. Such releases are typically issued when a mortgage has been paid off.

A lawyer for Ms. Brown said that she intends to enter a not guilty plea and that she had no criminal intent.

Since evidence of pervasive foreclosure improprieties emerged, state officials have mostly brought civil suits against the institutions and law firms that filed the fraudulent documents. Individuals in Nevada, for example, have been charged with notary fraud, but beyond that matter, criminal cases arising from foreclosure practices have been uncommon.

The Missouri grand jury found that the person whose name appeared on 68 documents executed on behalf of a lender — someone named Linda Green — was not the person who had signed the papers. The documents were submitted to the Boone County recorder of deeds as though they were genuine, Mr. Koster said.

A recent civil lawsuit against Lender Processing by the attorney general of Nevada found that former workers at one of its divisions had described their work as “surrogate signers.” One worker who was quoted in the complaint said she had been paid $11 an hour and told that her job was “to sign somebody else’s signature on documents.” The person said she had signed roughly 2,000 documents a day for months, according to the lawsuit.

The indictment is only the latest legal assault on the company and its parent, Lender Processing. In August 2011, American Home Mortgage Servicing, a large loan servicer, sued Lender Processing contending that more than 30,000 residential mortgages that it had handled across the country contained “improper execution, notarization and recording of assignments of mortgage.” DocX executed such paperwork for American Home from April 2008 through November 2009, the lawsuit said.

Last April, Lender Processing signed a consent order with the nation’s top financial regulators, agreeing to remediate improperly executed mortgage documents and to correct its default business practices. Michelle Kersch, a Lender Processing spokeswoman, said recently that the company now executed documents “with stringent controls in place” to ensure compliance with all rules.

This article has been revised to reflect the following correction:

Correction: February 8, 2012

An article on Tuesday about indictments on forgery charges of the loan processing firm DocX and its founder and former president, Lorraine O. Brown, misstated the given name for the lawyer representing the company. He is Scott Rosenblum, not Chris. (The lawyer defending Ms. Brown is Chris Rosenbloom.)

A version of this article appeared in print on February 7, 2012, on page B1 of the New York edition with the headline: Company Faces Forgery Charges in Foreclosures in Missouri.

A Boone County grand jury handed down the 136-count indictment against Docx and founder Lorraine Brown alleging that a person whose name appears on 68 notarized deeds of release didn’t actually sign the paperwork, Missouri Attorney General Chris Koster said in a statement yesterday.

“When you sign your name to a legal document, it matters,” Koster said. “Mass-producing fraudulent signatures on millions of real estate documents across America constitutes forgery.”

Lender Processing, based in Jacksonville, Florida, says about half of all U.S. mortgages by dollar volume are serviced using its loan-servicing platform.

Michelle Kersch, a Lender Processing spokeswoman, didn’t immediately return phone and e-mail messages seeking comment on the indictment. The indictment was reported earlier in the New York Times.

For America’s hard-hit homeowners, little relief from settlement

NEW YORK (Reuters) – Crystal Morello’s family pleaded for months with their lender for a cheaper mortgage on their family home in Belleville, Michigan. But time ran out last summer, and they left before they were evicted.

“The bank was reassuring us that it was helping us out,” says Morello, 26. “While we were getting a loan modification in one department, we were getting foreclosed in another.”

Nothing will get Morello back to the house she lived in since she was three, certainly not the small part her family might receive of a record $25 billion settlement announced Thursday between the government and five big U.S. banks accused of abusive mortgage practices.

Checks of up to $2,000 each are expected to reach 750,000 households who lost homes through the foreclosure process between 2008 and 2011.

As part of the deal, the banks also agreed to cut the amount of principal owed by homeowners and provide lower-interest rate loans to the tune of $17 billion for borrowers who are behind on their payments and who are at risk of foreclosure.

A further $3 billion is on tap to help homeowners who are current on their mortgages but are unable to refinance because they owe more than their homes are worth.

Critics of Thursday’s agreement, like Margaret Becker, director of the homeowner defense project at Staten Island Legal Services in New York, say the deal is “paltry”, at best.

“I don’t think it’s going to have a lot of meaning for consumers,” she says. The $25 billion settlement “is a miniscule amount of money and doesn’t begin to approach the banks’ legal liability for the fraud.”

New York state alone has 250,000 mortgages that are in foreclosure or more than 60 days late, Becker noted.

An estimated 10.7 million U.S. borrowers, or 22.1 percent, of all borrowers are ‘underwater’, according to Corelogic, a company that tracks real estate data.

They are believed to owe $700 billion more than their houses are worth as a result of the crash in U.S. housing prices.

Thursday’s agreement paves the way for the process of deciding which homeowners qualify for the $25 billion and many hurdles remain.

Borrowers have to be behind on their payments, and, in most cases, the loans have to be owned by the banks. Homeowners with mortgages held by state-run U.S. housing finance giants Fannie Mae and Freddie Mac are not eligible.

Even those who stand to benefit from the settlement aren’t convinced it will work. Some like Roger Duke, 41, plan to remain in the courts. “We’ve given up altogether on modifications,” says Duke, 41, whose Wellington, Florida home is in foreclosure. “We’ve tried everything the government has put out.”

When Duke, a sales manager at an industrial firm, purchased his home in 2005, he never imagined its value would plummet to $230,000 from $420,000. But Duke’s problems began almost immediately when he tried to refinance an adjustable-rate mortgage. One battle lead to another as the original lender fell into bankruptcy and the loan papers went missing.

“Our case is a perfect example of what is wrong with any kind of settlement because people need to go to jail for something like this,” he says. “It’s been a nightmare, but we’re in it for the long haul.”

In the meantime, people like Kathleen Dalton wait, worry and hope their banks will also settle with the government.

Dalton, who once owned her own insurance business, has spent the last three years battling for a permanent loan modification for her West Palm Beach, Florida condominium, which has dropped in value to $50,000 from $100,000.

Most recently, the lender sent her an offer for a temporary modification at a higher rate than her original mortgage with no terms nor explanation.

“I just want to save my home,” says Dalton, 61. “I hope that’s going to happen, but I don’t know because I’ve had my hopes go through the roof and then let down so many times that it’s affected me physically.”

For borrowers like Morello, the settlement is too little, too late. While it’s up to her parents, her family likely would use any money they get to repair the roof of the 1940s bungalow they purchased in Dearborn Heights, Michigan for $10,000 by pooling cash. Morello now lives there with her two-year-old daughter, her parents, a cousin, a dog and a cat.

Special report: Legal woes mount for a foreclosure kingpin

Fall leaves blow past an empty home (C) seen in a well kept neighborhood where the house is listed on the auction block during the Wayne County tax foreclosures auction of almost 9,000 properties in Detroit, Michigan, October 22, 2009. Credit: Reuters/Rebecca Cook

By Scot J. Paltrow

JACKSONVILLE, Florida | Mon Dec 6, 2010 2:10pm EST

JACKSONVILLE, Florida (Reuters) – Lender Processing Services is riding the waves of foreclosures sweeping the United States, but in late October its CEO, Jeff Carbiener, found himself needing to reassure investors in the $2.8 billion company.

Although profits were rolling in, LPS’s stock had taken a hit in the wake of revelations that mortgage companies across the country had filed fraudulent documents in foreclosures cases. Earlier in the year, the company, which handles more than half of the nation’s foreclosures, had disclosed that it was under federal criminal investigation and admitted that employees at a small subsidiary had falsely signed foreclosure documents.

Still, Carbiener told the Wall Street analysts in an October 29 conference call that LPS’s legal concerns were overblown, and the stock has jumped 13 percent since its close the day before the call.

But a Reuters investigation shows that LPS’s legal woes are more serious than he let on. Public records reveal that the company’s LPS Default Solutions unit produced documents of dubious authenticity in far larger quantities than it has disclosed, and over a much longer timespan.

Questionable signing and notarization practices weren’t limited to its subsidiary, called DocX, but occurred in at least one of LPS’s own offices, mortgage assignments filed in county recorders’ offices show. And rather than halt such practices after the federal investigation got underway, the company shifted the signing to firms with which it has close business ties. LPS provided personnel to work in the new signing operations, according to information from an LPS spokeswoman and court records including an October 21 ruling by a judge in Brooklyn, New York. Records in county recorders’ offices, and in the judge’s opinion, show that “robosigning” and preparation of apparently false documents went on at these sites on a large scale.

In one instance, it helped set up a massive signing operation at the nearby office of a major client, a spokeswoman for the client, American Home Mortgage Servicing, confirmed. LPS-hired notaries who worked there said in interviews that troves of documents were improperly handled. They said that about 200 affidavits per day were robosigned during the two months the two notaries remained there.

A spokeswoman for LPS confirmed to Reuters that it had helped other firms establish operations that performed the same function. LPS spokeswoman Michelle Kersch didn’t specify which firms. But beginning early in 2010, county recorders’ records show, signing shifted also to law firms under contract with LPS.

Interviews with key players and court records also show that pending investigations and lawsuits pose a bigger threat to the company than Carbiener let on.

The criminal investigation in Jacksonville by federal prosecutors and the Federal Bureau of Investigation is intensifying. The same goes for a separate inquiry by the Florida attorney general’s office. Individuals with direct knowledge of the federal inquiry said that prosecutors have impaneled a grand jury, begun calling witnesses and subpoenaed records from LPS.

The company confirmed to Reuters that it has hired Paul McNulty, former deputy U.S. attorney general in the George W. Bush administration, to represent it in the investigation. A spokeswoman for the U.S. Attorney’s office declined to comment on the probe.

The U.S. Comptroller of the Currency’s office, which is responsible for supervising national banks, also announced in November that it had teamed up with the Federal Reserve to conduct an on-site examination of LPS.

Meanwhile, the threats from four class action lawsuits filed in federal courts appear to be greater than the company has indicated, especially one filed in Mississippi. In a highly unusual move, a unit of the U.S. Justice Department has joined that suit as a plaintiff. The lawsuit alleges that LPS extracted many millions of dollars in kickbacks from law firms through an illegal fee-sharing arrangement, in exchange for doling out lucrative foreclosure work to them.

The lawsuit also charges that LPS illegally practices law and routinely misleads homeowners and federal bankruptcy judges. Carbiener has said there is little reason to worry about the Mississippi suit because the company already prevailed in a federal lawsuit in Texas that had made nearly identical accusations. But court records in that case show that the lawsuit was dropped without any ruling on the merits of the allegations.

Copies of LPS internal documents obtained by Reuters and testimony in lawsuits shed new light on the company’s unusual dealings with its vast network of law firms. LPS relentlessly pressed them for speed. The result was almost instant filing of foreclosure documents, mostly prepared by clerical workers, not lawyers, according to court records, including deposition testimony by LPS officials. Several judicial opinions from around the country and evidence from investigations in Florida show that these documents often were riddled with inaccurate information about the amount homeowners owed, and were signed and notarized en masse without anyone at the firms checking the information in them.

Under LPS’s system, law firms that were slower, often because their lawyers carefully prepared and reviewed court documents before filing them, were effectively punished, according to deposition testimony and other sources. The computer automatically assigned bad ratings to these firms, and the flow of work assignments to them dried up.

A BOOMING BUSINESS

Few firms benefited more from the collapse of the U.S. housing boom than LPS. Spun off as an independent company in 2008, the company has seen its profits, with big help from its mortgage default services business, reach $232 million for the first nine months of 2010. That is a nearly 15 percent increase from the same period in 2009. Its revenue last year was $2.4 billion, up from $1.8 billion in 2008.

And business continues to surge. Carbiener told analysts on the October 29 call that “we continue to gain market share across all key business segments.” In a November 23 report prepared for investors and clients, LPS said banks are pushing to foreclose on properties as rapidly as possible, driving “the foreclosure inventory rate to all-time highs.” It said that at the end of October, the number of properties going into foreclosure is “7.4 times historical averages and rising.”

The banks’ push to evict homeowners faster and in bigger numbers than ever before makes LPS’s services even more crucial to them. LPS’s success is built on its advanced, super-automated system that is highly efficient, low-cost, and speeds foreclosures through to completion. The “LPS Desktop” starts foreclosure actions, assigns work to law firms and supervises the cases to conclusion with almost no intervention by humans. (LPS says foreclosure actions are started by its clients, the loan servicers. But copies of agreements with servicers obtained by Reuters show that LPS has direct access to the banks’ and other servicers’ computer systems, and LPS detects defaults and initiates foreclosures based on parameters given to it by the banks.)

Few loan servicers could resist handing over key tasks to the company. Today, LPS boasts a client list that includes 14 of the 15 biggest loan servicers, with household names such as Wells Fargo and JPMorgan Chase — its two biggest clients, according to LPS’s most recent 10K filing with the Securities and Exchange Commission. The company has said that Bank of America joined as a client earlier this year. LPS says that all 50 of the nation’s largest banks use at least some of its services.

In essence, LPS is a giant electronic butler for the big banks and other companies in the industry. It attends to routine tasks the loan servicers prefer not to do themselves. These include tracking mortgage payments, calculating amounts owed to investors who purchased bundles of mortgages, ensuring that property taxes and insurance get paid — and automatically filing foreclosure actions when homeowners go into default.

The pending investigations and lawsuits, however, are focusing on whether LPS, in its zeal to serve its clients, broke the rules, in part by replacing missing bank documents with fictitious ones to make foreclosure cases go through.

SIGNATURE TROUBLE

The first sign of legal problems for LPS emerged earlier this year, when the company disclosed that federal prosecutors in Florida had opened a criminal investigation into apparently forged signatures on foreclosure documents prepared by DocX, the shuttered subsidiary located in a small office park in Alpharetta, Georgia.

Fidelity National Financial, LPS’s former parent, had bought DocX in 2005. The unit soon became a high-speed mill, churning out mortgage assignments — many of which are now known to be of doubtful validity — on behalf of banks and investor trusts, helping them to foreclose on homeowners.

Mortgage assignments are documents transferring ownership, usually from the original lenders to trusts owned by investors who bought securitized packages of mortgages. Loan servicers typically file foreclosure actions on behalf of the trusts when any of their mortgages go into default. But cases popping up all over the country show that the original lenders never handed over ownership of mortgages to the trusts. Assignments establishing ownership of a mortgage are required as evidence in foreclosure cases.

DocX turned out tens of thousands of newly-minted mortgage assignments, purporting to show transfers of ownership long after the mortgages should have been handed over to the trusts, according to the standard provisions in trust agreements.

Thousands of these bore the signature of DocX employee Linda Green. The signatures didn’t look alike, however, and LPS eventually confirmed that multiple DocX employees had signed her name. Some of the assignments stood out because they listed the new owner of the mortgages as “bogus assignee” or “bad bene.”

LPS spokeswoman Michelle Kersch said “bogus assignee” and “bad bene” were simply standard placeholders on document templates which the employees inadvertently had neglected to fill in with the proper names.

In his October 29 conference call with analysts, Carbiener said that when the company discovered the DocX wrongdoing in December 2009, it immediately stopped it and soon shut DocX down. But it turns out that DocX continued operating much longer than LPS originally had acknowledged. In a written response last week to questions from Reuters, LPS’s Kersch confirmed that DocX actually wasn’t closed until August 2010. She said: “The last document signed by DocX was on May 14, 2010.” But she said no improper signing had occurred there since 2009.

DUBIOUS DOCUMENTS

Hundreds of public records examined by Reuters show that production of suspect mortgage assignments was not limited to DocX.

The records indicate that employees in one of LPS’s own offices, in Mendota Heights, Minnesota, signed and notarized large numbers of documents which for multiple reasons appear invalid. Records filed with county recorders’ offices show that the Minnesota office continued to turn out these documents at least through the end of January 2010.

Dozens of assignments were signed by LPS Minnesota office employees who listed themselves as corporate officers of banks and other loan servicers, a sampling of public records from counties in five states shows. As at DocX, the assignments were signed years after the mortgages should have been transferred to the investment trusts.

The signature of one of these LPS employees, Liquenda Allotey, appears on thousands of mortgage assignments. Homeowners’ lawyers and at least one judge — federal bankruptcy judge Joel B. Rosenthal in Massachusetts — have noted that Allotey’s signature is a simple zigzag line, raising questions about whether other individuals may have signed his name. Titles listed below the signature identify him variously as “vice president” or “attorney in fact” for at least 13 banks and mortgage companies.

LPS spokeswoman Kersch said Allotey signed all of the documents himself, and said all mortgage assignments prepared in the Minnesota office “were executed under a lawful grant of authority.” She didn’t spell out, however, how such authority was given.

In any event, two other aspects of many mortgage assignments signed by Minnesota employees raise strong doubts about the documents’ legitimacy.

State laws, backed up by court decisions, require that mortgage investment trusts and others filing to foreclose on houses possess a valid mortgage assignment at the time they file for foreclosure. If it doesn’t, the laws require that the case be dismissed.

An examination of county recorders’ records turned up dozens of mortgage assignments signed and notarized by the Minnesota office weeks or months after a foreclosure case had been filed. Records show that even though invalid, the belated mortgage assignments often enabled foreclosure cases to sail through.

April Charney, an attorney who represents homeowners at Jacksonville Area Legal Aid, said in a Reuters interview that in most instances homeowners can’t afford lawyers and don’t challenge the foreclosures.

In many states, judges often approve the foreclosures without carefully examining the documents, she said. And at least until recently, when widespread questions were raised about the legitimacy of mortgage documents, judges routinely accepted belated mortgage assignments — even in cases contested by the homeowners, she said.

Equally difficult to explain are mortgage assignments signed by LPS Minnesota employees purporting to be officers of lenders that no longer existed. For example, in January 2010, two Minnesota employees jointly signed one as officers of Encore Credit Corp., defunct since 2008.

On other occasions, LPS employees signed as authorized officers of American Brokers Conduit, well after the subprime lender had been liquidated in bankruptcy. And in many instances they signed as officers of Sand Canyon Corp. In a March 18, 2009 affidavit, Sand Canyon’s president, Dale M. Sugimoto, said the company had completely exited the mortgage business in 2008 and had no mortgages to assign.

In written answers to questions, LPS spokeswoman Kersch didn’t respond directly to questions about the employees signing mortgage assignments after the foreclosures had been filed, or about signing on behalf of defunct companies. Instead, she said that the LPS employees signed mortgage assignments because lawyers who had filed foreclosure cases asked them to. She said the lawyers “decide when and if an assignment of mortgage is required.”

Shortly after the federal investigation was launched in December 2009, LPS began moving to curtail document-signing activities at the company itself. LPS says that the Minnesota office stopped signing mortgage assignments at the end of January 2010, and public records appear to confirm that. Carbiener said during the analysts meeting that LPS has now ended all signing of mortgage assignments and affidavits at the company.

Without someone to draw up replacement documents, though, LPS’s clients faced potential hardship, because so many mortgages were never assigned by lenders, as required, in the first place. Without these documents, thousands of foreclosures all over the country would come to a halt.

Reuters has learned that rather than stamping out the practice, LPS in December 2009 began transferring signing operations out of its own offices and into those of firms it has close relationships with. Kersch confirmed that LPS sent personnel to work “at client locations to assist clients during this period.”

For example, LPS arranged through a local employment service to hire about a dozen notaries, sending them to work at a new signing operation set up in the Jacksonville office of American Home Mortgage Servicing, one of LPS’s biggest clients.

Records from county recorders’ offices show that at least as recently as October, American Home Mortgage Servicing employees signed exactly the same type of questionable mortgages assignments that LPS staffers at DocX and in Minnesota had signed. These included assignments done on behalf of defunct companies like American Brokers Conduit, and after foreclosure actions already had been filed. Reuters obtained a partial list of the names of the LPS-hired notaries. Copies of mortgage assignments available publicly show that these notaries notarized many of these assignments, including ones signed on behalf of defunct companies.

In interviews, two of the notaries, who asked that they not be identified, said the American Home Mortgage Servicing office also set up a “robosigning” operation for affidavits, another type of document required in foreclosure cases. The employees who signed the affidavits were swearing that they had verified the facts listed in them, such as the specific amounts owed by homeowners.

But the two notaries, who said they were dismissed after raising questions with supervisors about the practices, said that each morning about a half-dozen American Home Mortgage Servicing employees in about an hour would sign some 200 affidavits received via LPS’s computer system, without reading them, let alone verifying the facts they contained. “In that time, come on, you have not verified figures in 200 documents. That’s impossible,” one of the notaries said.

Philippa Brown, spokeswoman for American Home Mortgage Servicing, said in an e-mailed statement that “We recently had independent audits conducted on our processes and it was found that at no time was AHMSI (American Home Mortgage Servicing Inc.) ‘robosigning’.” She confirmed that the company had used DocX until December 2009, and then “contracted with LPS” to provide it with notaries “in connection with execution of affidavits and other documents” in American Home Mortgage Servicing’s office. Concerning assignments the company signed for defunct lenders, Brown said American Home Mortgage Servicing “obtains authorization from the previous parties,” but did not explain how.

LPS acknowledged that it had sent notaries to several companies to help them set up signing operations. Kersch said: “When LPS Default Solutions group transitioned away from signing documents on behalf of its customers, in some cases it employed notaries who worked on-site at client locations to assist clients during this period.” The spokeswoman confirmed that LPS provided training at these sites, but said it was only “technical” training on using the LPS Desktop system.

TROLLING FOR CASES

It remains unclear whether LPS faces more legal risks because of its document-signing operations or because of its odd arrangement with the lawyers assigned to file foreclosure actions.

Reuters has obtained new details of how the relationship worked from copies of the “network agreements” the law firms sign with LPS, among other sources. Interviews and records from court cases show that this system often worked to the detriment of homeowners struggling to keep their homes.

LPS says that clients are the ones who pick law firms to represent them in foreclosure cases. But copies of its agreements with clients reviewed by Reuters state that the company’s clients sign up to use LPS’s network of lawyer. The agreements and depositions from lawsuits show that when a homeowner goes into default, the LPS system automatically selects a law firm in its network, sometimes using criteria set by a client, and transmits an offer of work that pops up on the law firm’s LPS Desktop screen.

The firm has no more than a couple of hours to accept the job. And if it does, it immediately agrees to pay an up-front fee to LPS. The law firms also pay LPS a monthly fee for use of the LPS Desktop system.

The company denies that it charges fees to lawyers in exchange for assignments of work. Kersch said the company charges fees strictly for the use of LPS’s computer system. Carbiener on October 29 said: “Our services are nonlegal, and are similar to any other operational cost of a law firm such as the licensing costs they pay for word-processing software or accounting software.”

But in a lawsuit deposition on January 13, 2010, Christian Hymer, an LPS first vice president, testified that the company often signs up the law firms that are part of its network. In addition, until recently, lawyers signed work agreements only with LPS, not with the loan servicers. Kersch said that currently lawyers are required to sign separate agreements both with LPS and the servicers.

Laws in nearly all states forbid lawyers to share legal fees with nonlawyers. The laws are intended to prevent kickbacks for funneling legal work to an attorney, the cost of which would be passed on to unsuspecting clients or, as in foreclosure cases, billed to homeowners.

LPS isn’t a law firm. The Mississippi class action suit alleges that LPS is a nonlawyer middleman between the servicers (acting on behalf of trusts that own the mortgages) and the lawyers. It alleges that the company illegally decides which law firms get to file foreclosure cases, and makes decisions about what they file.

RED, YELLOW, GREEN

Interviews, deposition transcripts and LPS’s own records underline that the company keeps its clients happy and maximizes its own fee income by whipping law firms to gallop cases through the courts.

The law firms are on a stopwatch: Kersch confirmed that the LPS Desktop system automatically times how long each firm takes to complete a task. It assigns firms that turn out work the fastest a “green” rating; slower ones “yellow” and “red” for those that take the longest.

Court records show that green ratings go to firms that jump on offered assignments from their LPS computer screens and almost instantly turn out ready-to-file court pleadings, often using teams of low-skilled clerical workers with little oversight from the lawyers. Copies of company newsletters from shortly before LPS was spun off show that the company each year gave awards to the law firms that were consistently the fastest.

Firms that move more slowly were slapped with “red” designations. For them, work offers dried up.

LPS denies that the rating system is used to punish slower firms. Kersch said the ratings are generated so that law firms can compare their speed and efficiency with an average calculated for a wide group of firms.

LEGAL AFFAIRS

The term “robosigners” was coined to describe the low-level clerical workers who signed many thousands of affidavits for foreclosure cases, swearing to the truth of facts they had never checked. But it turns out that the professionals at these firms — the attorneys who have strict legal and ethical obligations to file truthful documents in court — have carried out similar activities on a large scale. They allowed others to sign their names to multiple types of court pleadings they had never read or bothered to check, involving many types of documents.

In an April 2009 court decision, Diane Weiss Sigmund, a federal bankruptcy judge in Philadelphia, specifically faulted lawyers whose firm filed LPS-transmitted documents in court using clerical workers to sign the name of a lawyer who hadn’t looked at them.

In that case, it turned out that, contrary to the documents supplied via the LPS system, the homeowners weren’t in default on their mortgage.

Referring to the LPS computer system, the judge stated, “the flaws in this automated process become apparent.” She added: “An attorney must cease processing files and act like a lawyer.”

Jacksonville legal aid attorney Charney says that carelessly prepared documents, containing basic errors, have been used to foreclose on a big portion of the homeowners who have lost their houses.

LPS denies that its system encourages carelessness by law firms. In the October 29 conference call, Chief Executive Carbiener said that based on routine internal reviews, “we are not aware of any defects in our signing and review processes that resulted in the wrongful foreclosure of any borrower.”

A Mortgage Tornado Warning, Unheeded

Gary Bogdon for The New York Times

After his own experience dealing with a mortgage mess, Nye Lavalle set out to learn all he could about the mortgage industry, traveling nationwide to dig into records. In 2003, he compiled a dossier of practices at Fannie Mae. In hindsight, the problems he found look like a blueprint of today’s foreclosure crisis.

Published: February 4, 2012

YEARS before the housing bust — before all those home loans turned sour and millions of Americans faced foreclosure — a wealthy businessman in Florida set out to blow the whistle on the mortgage game.

His name is Nye Lavalle, and he first came to attention not in finance but in sports and advertising. He turned heads in marketing circles by correctly predicting that Nascar and figure skating would draw huge followings in the 1990s.

But after losing a family home to foreclosure, under what he thought were fishy circumstances, Mr. Lavalle, founder of a consulting firm called the Sports Marketing Group, began a new life as a mortgage sleuth. In 2003, when home prices were flying high, he compiled a dossier of improprieties on one of the giants of the business, Fannie Mae.

In hindsight, what he found looks like a blueprint of today’s foreclosure crisis. Even then, Mr. Lavalle discovered, some loan-servicing companies that worked for Fannie Mae routinely filed false foreclosure documents, not unlike the fraudulent paperwork that has since made “robo-signing” a household term. Even then, he found, the nation’s electronic mortgage registry was playing fast and loose with the law — something that courts have belatedly recognized, too.

You might wonder why Mr. Lavalle didn’t speak up. But he did. For two years, he corresponded with Fannie executives and lawyers. Fannie later hired a Washington law firm to investigate his claims. In May 2006, that firm, using some of Mr. Lavalle’s research, issued a confidential, 147-page report corroborating many of his findings.

And there, apparently, is where it ended. There is little evidence that Fannie Mae’s management or board ever took serious action. Known internally as O.C.J. Case No. 5595, in reference to the company’s Office of Corporate Justice, this 2006 report suggests just how deep, and how far back, our mortgage and foreclosure problems really go.

“It is axiomatic that the practice of submitting false pleadings and affidavits is unlawful,” said the report, a copy of which was obtained by The New York Times. “With his complaint, Mr. Lavalle has identified an issue that Fannie Mae needs to address promptly.”

What Fannie Mae knew about abusive foreclosure practices, and when it knew it, are crucial questions as Congress and the Obama administration weigh the future of the company and its cousin, Freddie Mac. These giants eventually blew themselves apart and, so far, they have cost taxpayers $150 billion. But before that, their size and reach — not only through their own businesses, but also through the vast amount of work they farm out to law firms and loan servicers — meant that Fannie and Freddie shaped the standards for the entire mortgage industry.

Almost all of the abuses that Mr. Lavalle began identifying in 2003 have since come to widespread attention. The revelations have roiled the mortgage industry and left Fannie, Freddie and big banks with potentially enormous legal liabilities. More worrying is that the kinds of problems that Mr. Lavalle flagged so long ago, and that Fannie apparently ignored, have evicted people from their homes through improper or fraudulent foreclosures.

Until a few weeks ago, Mr. Lavalle, 54, had never seen O.C.J. 5595. He had hoped to get a copy after helping Fannie’s lawyers, at Baker & Hostetler in Washington, complete it. He didn’t.

But after learning about its findings from a reporter for The Times, Mr. Lavalle said, “Fannie Mae, its directors, servicers and lawyers appeared to have an institutional policy of turning a willful blind eye to evidence of mortgage origination and servicing fraud.”

He went on: “When confronted directly with this evidence, Fannie not only failed to correct and remedy the abuses, it assisted in continuing the frauds via institutional practices that concealed fraudulent foreclosures.”

A spokesman for Fannie Mae said in a statement last week that the company quickly addressed several issues that were raised in the 2006 report and that it took action on other issues associated with foreclosures in 2010. “We want to prevent foreclosure whenever possible, but when foreclosures cannot be avoided they must move forward in a timely, appropriate fashion,” he said.

Fannie Mae would not say whether it had shared O.J.C. 5595 with its board of directors or its regulator, then known as the Office of Federal Housing Enterprise Oversight. James B. Lockhart III, who headed that regulator in 2006, said he did not recall reading the report. “I probably did not see it as back then foreclosures were not a very big deal,” he said.

But another report published last fall by the inspector general of the Federal Housing Finance Agency, the current regulator, briefly mentioned some of the problems that Mr. Lavalle had raised. (It didn’t mention him by name.) It also faulted Fannie Mae, saying it failed to address foreclosure improprieties that had surfaced years before.

LIKE most people, Nye Lavalle had little interest in the mortgage industry until things got personal. Raised in comfortable surroundings in Grosse Pointe, Mich., just outside Detroit, he began his business career in the 1970s, managing professional tennis players. In the 1980s, he ran SMG, a thriving consulting and research firm.

Then he tried to pay off a loan on a home his family had bought in Dallas in 1988. The balance was roughly $100,000, and the property was valued at about $175,000, Mr. Lavalle said. But when he combed through figures provided by his lender, Savings of America, he found substantial discrepancies in the accounting that had inflated his bill by $18,000. The loan servicer had repeatedly charged him late fees for payments he had made on time, as well as for unnecessary appraisals and force-placed hazard insurance, he said.

Mr. Lavalle refused to pay. The bank refused to bend. The balance rose as the bank tacked on lawyers’ fees and the loan was deemed delinquent. The fight continued after his mortgage was allegedly sold to EMC, a Bear Stearns unit.

Unlike most people, Mr. Lavalle had the time and money to fight. He persuaded his family to help him pay for a lawsuit against EMC and Bear Stearns. Seven years and a small fortune later, they lost the house in Dallas. Back then, judges weren’t as interested in mortgage practices as some are now, he said.

The experience lit a fire. Mr. Lavalle set out to learn everything he could about the mortgage industry. In a five-hour interview in Naples, Fla., last month, he described his travels nationwide. He dove into mortgage arcana, land records and court filings. By 1996, he had identified what appeared to be forged signatures on foreclosure documents, foreshadowing troubles to come. He took his findings to big players in the industry: Banc One, Bear Stearns, Countrywide Financial, Freddie Mac, JPMorgan, Washington Mutual and others. A few responded but later said his claims were not valid, he said.

Now he splits his time between Orlando and Boca Raton, advising lawyers as an expert witness. “From my own personal experience and 20 years of research and investigation, nothing — and I mean nothing — that a bank, lender, loan servicer or their lawyer says or puts on paper can be trusted and accepted as true,” Mr. Lavalle said.

FANNIE MAE, now in government hands, has acknowledged how abusive foreclosure practices can hurt its own business. “The failure of our servicers or a law firm to apply prudent and effective process controls and to comply with legal and other requirements in the foreclosure process poses operational, reputational and legal risks for us,” it said in a 2010 filing with the Securities and Exchange Commission.

Five years earlier, Fannie seemed to have taken a different view. That was when Mr. Lavalle pointed out legal lapses by some of its representatives. Among them was the law offices of David J. Stern, in Plantation, Fla., which was handling an astonishing 75,000 foreclosure cases a year — more than 200 a day. In 2005, Mr. Lavalle warned Fannie Mae that some judges had ruled that the Stern firm was submitting “sham pleadings.” Nonetheless, Fannie continued to do business with the firm until it closed its doors last year, after evidence emerged of rampant forgeries and fraudulent filings.

O.C.J. Case No. 5595 found that Stern wasn’t the only firm working for Fannie that seemed to be cutting corners. It also found that lawyers operating in seven other states — Connecticut, Georgia, New York, Illinois, Louisiana, Kentucky and Ohio — had made false filings in connection with work for Fannie Mae or the Mortgage Electronic Registration System, or MERS, a private mortgage registry Fannie helped establish in 1995.

“While Fannie Mae officials do not have a single opinion, some officials believe foreclosure counsel are sacrificing accuracy for speed,” the report said.

The lawyers at Baker & Hostetler did not agree with everything Mr. Lavalle said. Mark A. Cymrot, a partner who led the investigation, discounted Mr. Lavalle’s fear that Fannie could lose billions if large numbers of foreclosures had to be unwound as a result of misconduct by its lawyers and servicers.

Even so, the report didn’t conclude that Mr. Lavalle was wrong on the legal issues. It simply said that few people would have the financial resources to challenge foreclosures. In other words, few people would be like Mr. Lavalle.

“Courts are unlikely to unwind foreclosures unless borrowers can demonstrate that the foreclosure would not have gone forward with the correct pleadings, which is a difficult burden for most borrowers to meet,” the report said. “Nevertheless, the issues Mr. Lavalle raises should be addressed promptly in order to mitigate the risk of exposure to lawsuits and some degree of liability.” Mr. Cymrot declined to comment for this article.

O.C.J. 5595 also questioned Mr. Lavalle’s contention that improprieties by loan servicers were pervasive. But based on interviews with 30 Fannie employees, the report conceded that the company had no mechanism to ensure that servicers were charging borrowers appropriate fees.

Other oversight at Fannie was similarly lacking, the Baker & Hostetler lawyers found. For instance, when Fannie identified fraud by a lender or servicer, it didn’t notify the homeowner. Nor did it police activities of lawyers or servicers it hired. As a result, the report said, Fannie might not be insulated from liability for their misconduct.

Lewis D. Lowenfels, a securities law expert, said he was perplexed that Fannie’s board appeared to have done nothing to correct these practices. “If it had been brought to the board’s attention that specific acts of illegality were being committed, it should have directed that relationships with the transgressors be terminated forthwith and Fannie Mae’s regulator be advised accordingly,” he said.

Daniel H. Mudd, Fannie’s chief executive at the time, declined to comment through his lawyer. Mr. Mudd was recently sued by the S.E.C., accused of failing to disclose Fannie’s participation in the subprime mortgage market.

PERHAPS no development has done more to obscure the forces behind the foreclosure epidemic than the rise of the MERS, the private registry that has all but replaced public land ownership records. Created by Fannie, Freddie and big banks, MERS claims to hold title to roughly half the nation’s home mortgages. Judges and lawmakers have questioned MERS’s legal authority to initiate foreclosures, and some judges have thrown out foreclosures brought in its name. On Friday, New York’s attorney general sued MERS, contending that its system led to fraudulent foreclosure filings. MERS refuted the claims and said it would fight.

The report agreed. MERS’s approach of letting loan servicers foreclose in its own name, not in that of institutions owning the notes, “is not accepted legal practice in all states,” the report said. Moreover, “MERS’s counsel conceded false allegations are routinely made, and the practice should be ‘modified.’ ”

It continued: “To our knowledge, MERS has not addressed the issue of its counsels’ repeated false statements to the courts.”

Janis L. Smith, a spokeswoman for MERS, said it had not seen the Baker & Hostetler report and declined comment on its references to the false statements made on its behalf to the courts. She said that MERS’s business model is legal in all states and that as a nominee, it has the right to foreclose. MERS stopped allowing its members to foreclose in its name in all states in 2011.

Robert D. Drain, a federal bankruptcy judge in the Southern District of New York, said in court last month that the failure of the mortgage industry to deal with pervasive problems involving inaccurate documentation and improper court filings amounted to “the greatest failure of lawyering in the last 50 years.”

In an interview last week, Judge Drain said several practices have contributed to the foreclosure mess. One is that Fannie and the rest of the industry failed to ensure that MERS was operating legally in all states. Another is that the industry failed to perform due diligence on documentation.

MERS no longer participates in foreclosures. But a lot of damage has already been done, Mr. Lavalle said.

“Hundreds of thousands of foreclosures in Florida and across America were knowingly conducted unlawfully, for which there are still severe liabilities and implications to come for many years,” he said.

THERE was a time when Americans had mortgage-burning parties: When they paid off a promisory note, they celebrated by burning the release of the lien.

But they kept the canceled promissory note — and there was a reason for that. Promissory notes, like dollar bills, are negotiable currency. Whoever holds them can essentially claim them.

According to O.C.J. Case No. 5595, Fannie held roughly two million mortgage notes in its offices in Herndon, Va., in 2005 — a fraction of the 15 million loans it actually owned or guaranteed. Who had the rest? Various third parties.

At that time, Fannie typically destroyed 40 percent of the notes once the mortgages were paid off. It returned the rest to the respective lenders, only without marking the notes as canceled.

Mr. Lavalle and the internal report raised concerns that Fannie wasn’t taking enough care in handling these documents. The company lacked a centralized system for reporting lost notes, for instance. Nor did custodians or loan servicers that held notes on its behalf report missing notes to homeowners.

The potential for mayhem, the report said, was serious. Anyone who gains control of a note can, in theory, try to force the borrower to pay it, even if it has already been paid. In such a case, “the borrower would have the expensive and unenviable task of trying to collect from the custodian that was negligent in losing the note, from the servicer that accepted payments, or from others responsible for the predicament,” the report stated. Mr. Lavalle suggested that Fannie return the paid notes to borrowers after stamping them “canceled.” Impractical, the 2006 report said.

This leaves open the possibility that someone might try to force homeowners to pay the same mortgage twice. Or that loans could be improperly pledged as collateral by some other institution, even though the loans have been paid, Mr. Lavalle said. Indeed, there have been instances in the foreclosure crisis when two different institutions laid claim to the same mortgage note.

In its statement last week, Fannie said it quickly addressed questions of lost note affidavits and issued guidance to servicers that no judicial foreclosures be conducted in MERS’s name. It also said it instructed Florida foreclosure lawyers “to use specific language to assure no confusion over the identity of the ‘owner’ and the ’holder’ of the note.”

The 2006 report said Mr. Lavalle at times came across as over the top, that he was, in its words, “partial to extreme analogies that undermine his credibility.” Knowing what we know now, he looks more like one of the financial Cassandras of our time — a man whose prescient warnings went unheeded.

Now, he hopes dubious mortgage practices will be eradicated.

“Any attorney general, lawyer, bank director, judge, regulator or member of Congress who does not open their eyes to the abuse, ask pertinent questions and allow proper investigation and discovery,” he said, “is only assisting in the concealment of what may be the fraud of our lifetime.”

A version of this article appeared in print on February 5, 2012, on page BU1 of the New York edition with the headline: A Tornado Warning, Unheeded.